The trending topic among biotech people and the people who fund them these days is that it is almost impossible to scrounge up financing for startups in the earliest stages of drug development. As Xconomy’s Luke Timmermanwrote in July, the amount of money invested in first-round biotech financings fell by 60 percent in the first quarter of this year. It doesn’t look like 2013 will be any better—a survey of 600 venture capitalists and startup CEOs released this week by the National Venture Capital Association revealed that 49 percent think investments in biopharmaceuticals will be even lower next year, and only 13 percent expect an increase. Only 10 percent of respondents were willing to take the optimist’s view and predict that the sector will be overfunded, while 46 percent foresee underfunding.
So where does the scientist with a great commercial idea go? There is still Third Rock Ventures, the prolific Boston VC shop, focused exclusively on healthcare. The firm, which started in 2007, is working through its $426 million second fund, raised in 2010, and currently has some 30 firms in its investment portfolio, about half of them in early-stage development.
As Xconomist and Third Rock partner Alexis Borisy told me, “We invest early and in a big way.” But he also knows “there are fewer and fewer players doing this.” Third Rock prides itself in seeking groundbreaking, disruptive technologies and drugs, but it is also pretty innovative when it comes to financing. Its latest strategy is to offload some of the financial risk of early stage development onto Big Pharma—without giving up any control.
Borisy, pictured at top right, explained the strategy to me in his office in a charming old townhouse in Boston’s historic Back Bay that belies the cutting-edge science he’s backing. (Borisy says he does keep a second office across the river in Cambridge’s biotech-packed Kendall Square.) Borisy’s newest venture is Warp Drive Bio, also in Cambridge and launched last January. The enthusiastic Borisy, who is interim CEO of Warp Drive, has a long history with startups, having founded Cambridge-based Zalicus (NASDAQ: ZLCS) (formerly CombinatoRx) in 2000, and taking it public five years later. He joined Third Rock in 2009 and, in addition to Warp Drive, is the co-founder of two of the firm’s other startups, Blueprint Medicines and Foundation Medicine, both in Cambridge as well. “I see myself as a serial entrepreneur,” Borisy says. “I want to create two to three new companies in the next few years.”
His secret, he says, is to offload much of the tremendous risk of developing a new drug onto partners with very deep pockets—ideally, a big pharmaceutical company that may even contribute its own scientific resources to the effort. That’s the unusual model Borisy is following with Warp Drive, which doesn’t even have a drug yet. Instead, it built a $10 million genomic search engine platform that it will use to sift through plants and other natural organisms for promising microbes. Warp Drive will sequence the genomes of these microbes in a search for molecules that can be turned into drugs.
It’s the kind of far-out technology that might never find a backer in the current environment, especially since Borisy says it could be five years before Warp Drive finds a therapy that can be tested in a clinical trial. But Third Rock was able to lead a stunning $125 million round in the startup’s first financing. It did so by enlisting the backing of Sanofi (NYSE: SNY), which not only agreed to invest in Warp Drive but guaranteed that it will buy the whole company within the next five years if certain milestones are met.
“We talked to the R&D heads of several big pharma companies, and the idea [of Warp Drive’s genomic search platform] really resonated with them,” says Borisy. “When we started talking to Sanofi, they said, `Let’s try and figure out how to do this.’” The interesting wrinkle is that Sanofi, based in Paris, has no control over Warp Drive until, and if, it buys the company. Meanwhile, Borisy says Warp Drive will likely continue to make deals with other pharma companies interested in its technology.
This, he says, is a viable new model for all kinds of biotech startups. Big pharma companies, desperate for new compounds, can get access to innovative R&D at the earliest stages while investors decrease their liquidity risk. “I’m hearing a lot of companies now talking about Warp Drive-type deals,” he says, adding that Third Rock will definitely do more of them.
Meanwhile, biotech investors in general need to get back to seeking out transformational innovations, he says. “I know this is a hard industry, and we’re not smarter than anyone else out there, we just look at things differently.” Third Rock is as much an incubator of startups as an investor, he says, with a willingness to nurture and advise entrepreneurs for years before an innovation is ready to see the light of day.
Ultimately, though, it’s all about finding those innovations in the first place, and Borisy is certain there will be more and more to find in the next few years. He describes a life sciences industry that is in a golden age of discovery as scientists increasingly take advantage of such relatively recent breakthroughs as next-generation genomic sequencing, advances in stem-cell and genomics research, and powerful new imaging and diagnostic technologies.
“We think this is a great time to invest in early stage, because we are backing the science and drugs that matter,” he says.